Deloitte & Touche LLP is pleased to respond to the Securities and Exchange Commission's (the "Commission") request for comments on its proposed rule regarding Conditions for Use of Non-GAAP Financial Measures (File No. S7-43-02).

I. Introduction

We strongly support the goals of the President of the United States, the United States Congress, and the Commission to improve the quality and transparency of financial reporting. Many provisions of the Sarbanes-Oxley Act of 2002 (the "Act") will serve to effect positive changes. We are committed to assisting the Commission in the adoption of responsible rules to effect changes that serve to positively impact the quality of financial reporting and help to restore investor confidence in our capital markets. One element of the implementation of the Act is the Commission's proposed rule implementing Sections 401(b) and 409 concerning the use of financial measures derived on the basis of methodologies other than Generally Accepted Accounting Principles ("GAAP) in filings with the Commission and other public disclosures.

We support the objectives of the proposed rule to improve the transparency and quality of disclosure of non-GAAP financial measures and related information and to enhance the current reporting of earnings information. We believe the proposal will improve the quality, timeliness and accessibility of publicly available financial information and help to ensure that investors and others are not misled by the use of non-GAAP financial information by registrants. Accordingly, we support the issuance of rules in this area.

Our comments below are provided in response to the requests for comment and are intended to present our views on the key aspects of the proposal and to address certain specific areas in which we believe the proposed rule should be modified or clarified in order to better meet the Commission's stated objectives. In summary, we believe the Commission should (1) not categorically prohibit any particular non-GAAP financial measure provided that the measure is balanced and accompanied by the required explanatory disclosures proposed in the rule and (2) conform the disclosure requirements under proposed Regulation G with the more detailed requirements proposed for non-GAAP financial measures included in documents filed with the Commission.

II. Proposed Regulation G

We support the requirements proposed in new Regulation G, which would apply whenever a registrant publicly discloses or releases material information that includes a non-GAAP financial measure. This regulation would prohibit material misstatements or omissions that would make the presentation of the non-GAAP financial measure, under the circumstances in which it is made, misleading and would require a quantitative reconciliation (by schedule or other clearly understandable method) of the differences between the non-GAAP financial measure presented and the most comparable financial measure calculated and presented in accordance with GAAP.

The Commission has asked whether the proposed definition of a non-GAAP financial measure captures the non-GAAP financial information where enhanced disclosure is necessary. The proposal defines a non-GAAP financial measure as a numerical measure of a registrant's historical or future financial performance, financial condition or cash flows that (1) excludes amounts, or is subject to adjustments that have the effect of excluding amounts, that are included in the comparable measure calculated and presented in accordance with GAAP in the statement of income, balance sheet or statement of cash flows of the issuer, or (2) includes amounts, or is subject to adjustments that have the effect of including amounts, that are excluded from the comparable measure so calculated and presented. Excluded from the scope of the definition are operating and other statistical measures (for example, unit sales or number of employees) and ratios and measures calculated using only financial measures calculated in accordance with GAAP (for example, sales per square foot or same store sales, assuming the sales figures were calculated in accordance with GAAP). We believe the proposed definition captures the appropriate non-GAAP financial information where enhanced disclosure is warranted.

The Commission has asked whether the more detailed disclosure requirements when non-GAAP financial measures are included in Commission filings should be required in all cases, even in documents not filed with the Commission. We believe the Commission should consider conforming the disclosure requirements under proposed Regulation G with the more detailed requirements (modified as recommended below in our response on the proposed amendments to Item 10) proposed for non-GAAP financial measures included in documents filed with the Commission. These additional requirements include, but are not limited to, disclosure of the purposes for which management uses the non-GAAP financial measure and a statement describing why management believes the measure is useful to investors. We believe consistent disclosure should be provided whether or not the measures are used in filings with the Commission. Conforming the disclosure requirements should not be overly burdensome to registrants since if non-GAAP financial measures are communicated orally, telephonically, in a webcast or broadcast or by similar means (for example, earnings conference calls or webcasts that typically accompany the issuance of earnings releases), the proposal permits a registrant to provide the required information by posting it on the registrant's website and disclosing the location of the website and the availability of the information during the presentation.

The Commission has asked whether Regulation G should require the presentation of a reconciled full consolidated balance sheet, income statement and cash flow statement when non-GAAP financial measures are presented. We do not believe registrants should be required to present reconciled full financial statements.

The Commission has asked whether Regulation G should require registrants to disclose whether the quantitative reconciliation has been reviewed or audited by their independent accountants. We believe the final rule should specifically state that the quantitative reconciliation required by proposed Regulation G is not required to be reviewed or audited. Although we do not believe disclosure regarding whether a review or audit was performed is necessary, to avoid confusion, it may be useful for registrants to label the information as "unaudited."

Finally, the Commission has asked whether as an alternative to requiring reconciliation to the most comparable GAAP financial measure, the proposal should require reconciliation to specific GAAP financial measures (such as, net income and operating cash flows). We do not believe reconciliation to specific GAAP financial measures should be required. The most meaningful and relevant presentation is for registrants to reconcile to the most comparable GAAP measure and not to a specific GAAP financial measure which may not be comparable.

Proposed Item 10 would prohibit the following non-GAAP financial measures: (1) non-GAAP per share measures; (2) non-GAAP liquidity measures that exclude charges or liabilities that required, or will require, cash settlement; and (3) non-GAAP performance measures that eliminate or smooth items identified as non-recurring, infrequent or unusual, when the nature of the charge or gain is such that it is reasonably likely to recur. We do not believe the Commission should categorically prohibit any particular non-GAAP financial measure provided that the measure is accompanied by the required explanatory disclosures proposed in the rule. Management of each registrant is best able to decide which particular measures are most useful and relevant to its investors based on the registrant's specific facts and circumstances. Inclusion of the proposed explanatory disclosures will enable investors to understand these measures and will result in registrants providing only those non-GAAP financial measures that provide information that management can explain as useful and relevant. Registrants will therefore be naturally discouraged from using non-GAAP financial measures whose usage and purpose can not be justified.

In addition, practical implementation issues exist with respect to the proposed prohibition on non-GAAP liquidity measures that exclude charges or liabilities that required, or will require, cash settlement and non-GAAP performance measures that eliminate or smooth items identified as non-recurring, infrequent or unusual, when the nature of the charge or gain is such that it is reasonably likely to recur. Different prohibitions on the calculation of a particular non-GAAP financial measure would exist depending on whether management considers the measure to be a performance or a liquidity measure. Significant, subjective judgments would need to be made to determine whether an item is reasonably likely to recur in order to determine whether the item can be eliminated in calculating the non-GAAP performance measure. Management should be allowed to provide non-GAAP performance measures that eliminate charges identified as non-recurring, infrequent or unusual provided that the presentation can be balanced with an elimination of similar types of gains and all of the proposed required disclosures accompany the measure. In the event that management is unable to present a balanced non-GAAP measure that also identifies and eliminates non-recurring, infrequent or unusual gains, then management should not present the non-GAAP measure as it may be misleading.

If the final rule retains the prohibition on non-GAAP performance measures that eliminate or smooth items identified as non-recurring, infrequent or unusual, when the nature of the charge or gain is such that it is reasonably likely to recur, the Commission should consider providing, in the text or elsewhere, examples of items that would fall within and outside of the scope of the prohibition. While we are not opposed to what the Commission is attempting to achieve with this provision, we are concerned about registrants' ability to apply it. We believe it is unclear what types of items may be included or eliminated in calculating a non-GAAP performance measure. For example, "operating income" is a common non-GAAP performance measure in the insurance industry which is typically defined as net income (or loss) before the cumulative effect of accounting changes and the after-tax effect of realized capital gains and losses. "Adjusted operating income", which adjusts "operating income" for other items, may also be presented. Would adjusting "operating income" for the impact of restructuring charges, litigation expense, or the effects of the September 11 terrorist attacks to arrive at "adjusted operating income" be prohibited under the proposed rule?

We support the remaining proposed amendments to Item 10 of Regulation S-K, Item 10 of Regulation S-B and Form 20-F. Specifically, we support the disclosures in the proposed amendment to Item 10, which would require that registrants using non-GAAP financial measures in filings with the Commission provide: (1) a presentation, with equal or greater prominence, of the most directly comparable financial measure calculated and presented in accordance with GAAP; (2) a quantitative reconciliation of the differences between the non-GAAP financial measure and the most comparable GAAP financial measure; (3) disclosure of the purposes for which management uses the non-GAAP financial measure; and (4) a statement describing why management believes the measure is useful to investors. We also agree with the proposed prohibitions that a non-GAAP financial measure: (1) should not be presented in a manner that gives it greater authority or prominence than the comparable GAAP financial measure; (2) should not be presented on the face of, or in the notes to, the historical financial statements or on the face of any pro forma financial statements required by Article 11 of Regulation S-X; and (3) should not use a title or description that is the same as, or confusingly similar to, titles or descriptions used for GAAP financial measures.

The Commission has asked whether non-GAAP financial measures should be presented in a separate section of a Commission filing. We think the measures need not be presented in a separate section of the filing. However, as stated above, these measures should not be presented on the face of, or in the notes to, the historical financial statements or on the face of any pro forma financial statements presented under Article 11 of Regulation S-X. We believe that presentation of the information, along with the explanatory disclosures, in Management's Discussion and Analysis ("MD&A"), the business section, and an "other data" section of selected financial data is generally appropriate.

The Commission has asked whether the requirements for filings and those required under Regulation G should be different. As indicated previously in our response, we believe the Commission should consider conforming the disclosure requirements under proposed Regulation G with the more detailed requirements (modified as recommended above) proposed for non-GAAP financial measures included in documents filed with the Commission. We believe consistent disclosure should be provided whether or not the measures are used in filings with the Commission.

The Commission has asked whether the requirement to include a quantitative reconciliation of prospective measures in Commission filings should have an "unreasonable effort" exception similar to that in proposed Regulation G. Regulation G states that if a comparable GAAP financial measure is not available on a forward-looking basis, registrants must disclose this fact and provide any reconciling information that it is reasonably capable of providing. Any information that is unavailable must be identified, along with its probable significance. We believe the Commission should add an "unreasonable effort" exception for forward-looking information to the proposed amendments to Item 10, consistent with that provided in Regulation G. The absence of such an exception may discourage the disclosure of forward-looking information. In addition, guidance should be provided to define what is considered "unreasonable effort."

The Commission has asked whether a registrant that presents a non-GAAP financial measure for a previous period should be required to present the same measure in future filings where the previous period is compared to a recent period. We do not believe the Commission should mandate the use of non-GAAP financial measures. A registrant's facts and circumstances could change such that the purpose for which management previously used the measure is no longer valid or a non-GAAP financial measure that was previously used is judged to be no longer useful to investors. However, whatever non-GAAP financial measure management elects to disclose should be calculated and presented consistently for all periods. For example, if earnings before interest, taxes, depreciation and amortization, adjusted for certain nonrecurring items, is presented for the first fiscal quarter of 2003, then the same measure should be presented for the prior comparable period included in the release or announcement and the measures should be prepared on a consistent basis. Consistent presentation between periods is necessary for investors and other users of the information to analyze and understand a registrant's financial performance and condition and related trends.

In addition, the Commission has asked whether the disclosure requirements under proposed Regulation G and amended Item 10 should be applicable to non-GAAP financial measures that represent projections or forecasts of results of business combination transactions ("post-transaction measures") and are filed with the Commission pursuant to Exchange Act Rules 14a-12 and 14d-2 and Securities Act Rules 165 and 425. We believe that post-transaction measures that meet the definition of a non-GAAP financial measure in the proposal should be subject to the disclosure requirements of proposed Regulation G and amended Item 10. However, public disclosure of the potential benefits to be achieved by the business combination (for example, synergies, valuations, and dividend amounts) should be excluded from the disclosure requirements as these items do not appear to fall within the scope of the proposed definition.

Furthermore, to avoid any potential confusion, the final rule should specifically exclude from its scope pro forma information filed with the Commission pursuant to the communication rules applicable to business combinations (for example, pro forma per share data of the acquiring company and equivalent pro forma per share data of the target company presented pursuant to Instruction 7(b)(10) to Item 14 of Schedule 14A). A similar exclusion is already provided in the proposal for pro forma information presented pursuant to Article 11 of Regulation S-X. The Commission should also specifically exclude from the scope of the final rule any pro forma disclosures required under GAAP. For example, paragraph 61 of Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets, requires the disclosure of certain transitional pro forma information. The required disclosures include, but are not limited to, income before extraordinary items and net income adjusted to exclude amortization expense, and adjusted earnings-per-share amounts. A similar exclusion is already provided in the proposal for segment information prepared pursuant to SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information.

IV. Proposed New Item 1.04 of Form 8-K

We support the proposed amendment to Form 8-K to require registrants to file with the Commission releases or announcements disclosing material non-public financial information about completed annual or quarterly fiscal periods within two business days of any such release or announcement. In fact, our response letter to the Commission's proposed rule on Additional Form 8-K Disclosure Requirements and Acceleration of Filing Date recommended that the Commission consider requiring in a Form 8-K or some other periodic form disclosure of the information provided in quarterly and annual earnings releases. Although disclosures of this nature are subject to Regulation FD, and are often disclosed under existing Item 9 of Form 8-K, requiring that the information is "filed" with the Commission as an exhibit to proposed Item 1.04 of Form 8-K will ensure that the disclosure is part of the formal disclosure system and available to investors on a widespread basis.

The proposed rule defines GAAP as generally accepted accounting principles in the United States. However, in the case of foreign private issuers, references to GAAP would include the principles under which the primary financial statements are prepared ("Home-Country GAAP"). We support the requirement in Regulation G and Item 10 of Regulation S-K to reconcile non-GAAP financial measures to the most comparable Home-Country GAAP financial measure. We note that the Commission's current requirement under Item 17 of Form 20-F to reconcile Home-Country GAAP to U.S. GAAP provides financial statement users with the information necessary to understand the differences between the most comparable Home-Country GAAP financial measures and the same measures prepared in accordance with U.S. GAAP. Consequently, we believe there is no need to require an additional reconciliation of the non-GAAP measure to the same measure under U.S. GAAP. Rather, users should be able to rely on the Commission's existing disclosure requirements for any differences between Home-Country and U.S. GAAP as it relates to the most comparable GAAP financial measure.

The proposed rule provides for a limited exception to the disclosure requirements of Regulation G for foreign private issuers that satisfy the following three conditions: (1) the registrant's securities are listed or quoted on a securities exchange or inter-dealer quotation system outside the United States; (2) the non-GAAP financial measure and the most comparable GAAP financial measure are not calculated and presented in accordance with U.S. GAAP; and (3) the disclosure is made by or on behalf of the registrant outside the United States, or is included in a written communication that is released by or on behalf of the registrant only outside the United States. We believe the Commission should consider clarifying when the third condition would be met. For example, it is unclear whether this condition would be met when a foreign private issuer releases a written communication to the branch office of a financial news agency, which is headquartered in the United States.

The proposed rule permits a foreign private issuer to use a non-GAAP financial measure that would otherwise be prohibited in filings with the Commission, if the measure is expressly permitted under Home-Country GAAP and is included in the issuer's annual report used in its home country jurisdiction or market. The prohibitions in Item 10 of Regulation S-K include presenting non-GAAP financial measures on the face of the financial statements prepared in accordance with GAAP and non-GAAP per share amounts. The instructions to paragraph (e) of Item 10 of Regulation S-K raise questions about the use of non-GAAP financial measures permitted by securities regulators in a foreign private issuer's home jurisdiction or market, but not "expressly permitted" under the codified Home-Country GAAP. It is unclear if such non-GAAP financial measures, which would otherwise be prohibited, would be permitted under the proposal.

In addition, we believe the instructions to paragraph (e) of Item 10 that permit the use of an otherwise prohibited non-GAAP financial measure could be interpreted too broadly. For example, an issuer that discloses a non-GAAP per share amount that is expressly permitted by Home-Country GAAP could interpret the instruction to not only allow presentation of the per share amount but to also exempt the measure from the other disclosure requirements in proposed Regulation G and Item 10. We believe the Commission should clarify the scope and extent of the proposed exemption for foreign private issuers.

VI. Transition

The proposed rule does not provide for any transition period. The final rules should provide an appropriate period of time for transition. We believe this period of time should be relatively short (for example, 15 to 30 days after the final rule is issued) given that the proposed requirements do not appear overly burdensome to registrants.

Periodic reports filed prior to the effectiveness of the final rule may contain non-GAAP financial measures without all of the disclosures which will be required under Item 10 of Regulation S-K and Regulation S-B, as well as Form 20-F. If these periodic reports are incorporated by reference into registration statements, we do not believe that an amendment to the periodic reports to include the required disclosure or to delete any prohibited non-GAAP measures would generally be warranted. Rather, any additional requirements under Item 10 could be included in the registration statement or the next Form 10-Q to be filed to eliminate the need to amend prior documents.

VII. Conclusion

We support improving the quality, timeliness and accessibility of publicly available financial information and the effort to eliminate the manipulative or misleading use of non-GAAP financial measures. We support new Regulation G, which would impose specific requirements on the public disclosure of any material information that includes a non-GAAP financial measure, the amendments to Item 10 of Regulation S-K and S-B, which would impose additional specific requirements on the use of non-GAAP financial measures in documents filed with the Commission, and the amendment to Form 8-K, which would require registrants to file earnings releases within two business days of such release or announcement.

However, we urge the Commission to consider our suggestions for modifications to or clarifications of the proposed rule to best accomplish the Commission's objectives. In summary, we believe the Commission should (1) not categorically prohibit any particular non-GAAP financial measure (such as, non-GAAP per share measures, non-GAAP liquidity measures that exclude charges or liabilities that required, or will require, cash settlement and non-GAAP performance measures that eliminate or smooth items identified as non-recurring, infrequent or unusual, when the nature of the charge or gain is such that it is reasonably likely to recur) provided that the measure is balanced and accompanied by the required explanatory disclosures proposed in the rule and (2) conform the disclosure requirements under proposed Regulation G with the more detailed requirements proposed for non-GAAP financial measures included in documents filed with the Commission.

If you have any questions, please contact Robert J. Kueppers at (203) 761-3579.